The Role of Credit Markets in a Transition Economy with Incomplete Public Information

Author/Editor:

Jorge Roldos ; Kenneth Kletzer

Publication Date:

February 1, 1996

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

In this paper we explore some of the informational problems that constrain the development of credit markets in transition economies. We characterize investment patterns under uncertainty and high costs of entry, when agents learn about the ultimate value of enterprises through production in a Bayesian way. Inefficiencies due to the lack of public information reduce the average return to capital. Under asymmetric information, credit would go to activities that can provide enough co-finance. Credit markets may fail to develop for a while if there is not enough individual wealth to complement credit. Once they operate, credit markets may magnify distortions in equity markets, such as those due to spontaneous privatization. An argument for the sequencing of capital market liberalization is provided.

Series:

Working Paper No. 1996/018

Subject:

Credit Environment Financial institutions Financial markets Loans Money Stock markets Stocks

English

Publication Date:

February 1, 1996

ISBN/ISSN:

9781451922776/1018-5941

Stock No:

WPIEA0181996

Pages:

26

Please address any questions about this title to publications@imf.org